Taxes on rich people helped to beat inflation (and Hitler)

Did you know progressive taxes helped beat Hitler?

If not, don’t worry, you’re not alone. It’s worth looking back at how taxes helped tackle inflation during WWII and what lessons NC leaders still need to draw from that bit of economic history.

During and right after WWII, the Roosevelt Administration faced extraordinary inflationary pressures, driven by some of the same dynamics we see playing out right now.

In the current moment, supply chain disruptions, stimulus that could have been better targeted to people in need, and shifts in consumers’ purchasing patterns mean more demand for some goods and services than the market can easily meet, allowing companies to increase prices. In WWII, civilian productivity was diverted to the war effort as companies like Ford started making tanks instead of cars. As the same time, many workers, like women who came to work in factories vital to the war effort, saw their incomes rise significantly.

In both instances, constrained supply and expanded consumer demand threatened to create an inflationary feedback loop with prices and wages driving each other up, undermining the stability of the dollar and the US economy.

Just as now, letting that kind of spiral set in would have been an economic disaster. Allowing inflation to upend the civilian economy threatened the industrial foundation of the war effort, so the Roosevelt Administration implemented a raft of policies to keep prices in check. Price ceilings for consumer goods, wage freezes for major industries, ration cards, campaigns to get U.S. citizens to invest in war bonds instead of buying consumer goods, and … wait for it … progressive taxes.

The dual need to pay for war against fascist powers and to combat inflation on the home front led to deep restructuring of the US tax code. Having already established a wealth tax in 1935 to help pay for policies to fight the Great Depression, the Roosevelt Administration pushed through a variety of tax changes during and following WWII. The top marginal rate for personal income taxes was pushed above 90 percent[1] and would stay there until the 1960s;[2] the individual income tax was expanded beyond the very wealthy to apply to tens of millions of Americans; the corporate tax rate went up, and a 90 percent tax on excess corporate profits was created. All of these measures helped to pay for the war, but they also were designed to combat inflation by reducing excess consumer demand.

And it worked.

Inflation did peak at more than double the current rate as WWII soldiers returned with cash in their pockets and industry transitioned back to a civilian footing, but we never saw the runaway spiral of wages and prices that would have unmade the US economy.

We’ve seen some efforts to use tax policy to combat inflation over the past year. By enacting a minimum tax on big profitable corporations, taxing stock buybacks, and tightening loopholes wealthy people use to reduce their taxes,[3] the Inflation Reduction Act moved to tax excess wealth. Leading economists agree[4] these changes will curb inflationary pressures on prices. Across the pond, the UK recently imposed a windfall tax on energy companies[5] that have used the current environment to rake in record profits.

Unfortunately, this year’s budget continues North Carolina down a very different path.

Instead of increasing taxes on wealthy people and profitable companies as we did during WWII, the legislature left in place policies enacted in recent years that have slashed taxes on rich people and big corporations. Even though the majority of North Carolinians think corporations should pay their fair share[6] and most of the benefit would go to investors outside the state, last year’s budget scheduled the corporate income tax to completely disappear by 2030.

Last year continued a series of changes dating back to 2013 that leave even more capital where it is least needed: on the balance sheets of big corporations and in the bank accounts of wealthy shareholders. The result is corporations keep more of the profits they have raked in by gouging consumers over the past year and well-off consumers bid up prices for everything from cars to coffee.

History can be a wonderful teacher, and in these trying times, we should heed what the past can tell us.

[1] Urban Institute – Tax Policy Center, “Major Enacted Tax Legislation, 1940-1949,” accessed September 5, 2022, https://www.taxpolicycenter.org/laws-proposals/major-enacted-tax-legislation-1940-1949.

[2] “Historical Highest Marginal Income Tax Rates,” Tax Policy Center, February 9, 2022, https://www.taxpolicycenter.org/statistics/historical-highest-marginal-income-tax-rates.

[3] “Four Tax Policy Wins in the Inflation Reduction Act and Four More That Can Build on This Progress,” ITEP, accessed September 5, 2022, https://itep.org/four-tax-policy-wins-in-the-inflation-reduction-act-and-four-more-that-can-build-on-this-progress/.

[4] “EPI Applauds Senate Passage of the Inflation Reduction Act,” Economic Policy Institute, accessed September 5, 2022, https://www.epi.org/press/epi-applauds-senate-passage-of-the-inflation-reduction-act/.

[5] “Energy Prices: How Will the £5bn Windfall Tax Work?,” BBC News, August 16, 2022, sec. Business, https://www.bbc.com/news/business-60295177.

[6] “Elimination of the Corporate Income Tax Will Hurt North Carolina,” The Pulse (blog), November 5, 2021, http://pulse.ncpolicywatch.org/2021/11/05/elimination-of-the-corporate-income-tax-will-hurt-north-carolina/.